People lose money shorting stocks because they do it wrong. Easy money is made in bull markets by being long monster stocks not trying to bet when they will stop going up. This kind of shorting does not put the odds in your favor, shorting is not even worth the trouble in up trends. Monster stocks are also dangerous to short with their ability to go up huge amounts in one day.
Here are the best short plays during corrections and bear markets.
- It is safe to short a fallen leader, one that has had its story change and is now struggling to stay above its 50 day moving average and losing it multiple times. Shorting as it falls below its 50 day is the right place to short a former monster stock in a down trend after the S&P 500 has also lost its 50 day moving average also.
- If you ever hear the term “accounting irregularities” it is safe to go short, think Enron or Global Crossing, once trust in a company is lost big money starts to get out.
- It is safe to short the victims of monster stocks if Apple has taken over the cell phone market then RIMM is probably the biggest loser. If Amazon has taken over the book industry then book stores are the victims. When capital is flowing into one company it had to come from somewhere, less earnings=lower stock prices.
- A company can misstep so badly that its customers leave and investors leave with them. Think Netflix’s great idea to change their business radically. OOPS!
- It is safe to short a stock of a company facing a true disaster and catastrophe when the ramifications are not fully understood. Think BP leak in the gulf or the Exxon Valdez. The short works until the damage and costs are quantified.
As with longs only risk 1% of total capital per trade and use stop losses and trailing stops.
While a company’s story can get you on board a trend the chart is the boss.
Here are some shorts to study: